The Corporate Transparency Act – October 2023 Update

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Annie: Hello, everyone, and welcome to today's webinar, "The Corporate Transparency Act, October 2023 Update." My name is Annie Triboletti, and I will be your moderator for today's session.

So joining us are Paul Hodnefield and David Jefferis. Paul is the associate general counsel for CSC, where he's responsible for advising the company regarding real estate recording, notary, Uniform Commercial Code, and other public recording transaction services. And David is a senior director of product management for Global Compliance and Governance Services at CSC in our Wilmington, Delaware headquarters office. David has been with CSC for over 15 years and has significant experience providing training, implementation, and consultative services to clients of our CSC Entity Management.

And with that, I'd like to welcome David and Paul.

Paul: Thank you, Annie. As she said, this is Paul Hodnefield, and I'm associate general counsel for CSC. And among my responsibilities is keeping close watch on the Corporate Transparency Act and helping the company develop our compliance procedures. The Corporate Transparency Act is probably the most important act related to corporate law to come down in quite some time. It for the first time establishes some federal requirements that are uniform nationally for company formation. And it is important for anybody involved in the company formation or registration process to understand this act.

So what I'm going to do today is provide a high-level overview of the Corporate Transparency Act. I'm going to begin with a basic overview. Then I'll go into the companies that have to report, what the report contents consist of, the requirements for update and correction reports, the use of a FinCEN identifier which is a filing shortcut that the act provides for, and finally reporting violations. And then, if there are any questions, we'll have a mechanism to deal with those as well. So with that, I'll go ahead and get started.

So we'll go ahead and get started with a brief overview of the Corporate Transparency Act. Well, the most important thing about the Corporate Transparency Act is that for the first time it places certain disclosure obligations on what are called reporting companies. A reporting company has to submit a report to FinCEN that contains information about itself as well as personal information about each beneficial owner and company applicant.

This raises the question of what is a reporting company. Well, a reporting company is a broad definition. It includes any domestic corporation, LLC, or similar entity, as well as any foreign company that registers to do business in the United States. Now it is a broad definition, but there are numerous exceptions. There's awful lot of exceptions for entities that are already regulated or are large operating companies, and I'll come back to these in a minute.

Now they have to report information on their beneficial owners. A beneficial owner is defined by the act to include any individual who holds at least 25% ownership in the entity, and that's calculated by, I guess, adding together all of the ownership interests that that person has, or any person that exercises substantial control. So a beneficial owner may include people that don't own any type of equity in the company.

The company must also report the information on its company applicant or company applicants. There can be up to two. A company applicant is defined in the act as the person that directly files the document with a state or other government entity to form the entity, or the person that files the documents to register a foreign company. And if the person is different, the company applicant definition includes the person that directed the filing. So there can be up to two company applicants per reporting company.

To understand the reporting obligations required by the Corporate Transparency Act, it's helpful to understand some of the policies that FinCEN followed in drafting the regulations that determine the reporting requirements. The first thing is that the responsibility for providing complete and accurate information is going to fall solely on the reporting company. Reporting companies will be responsible for whatever information they report to FinCEN. So if they get bad information, the company is the one that's going to be responsible for it. Or if somebody certifies that the information is true and correct and it isn't, it's the company that will be subject to any action by FinCEN. So the company is solely responsible for gathering the information that needs to be reported for each beneficial owner and applicant as well as the information about itself.

FinCEN, through its regulations and the act itself, is intentionally targeting small companies. It is looking at companies that are not otherwise generally regulated and therefore they aren't subject to beneficial owner reporting requirements from other agencies, like a public traded company would be or an insurance company or something like that. In fact, the exceptions that apply to the reporting company definition almost all apply to larger companies that are subject to regulation already.

And when balancing the burdens of gathering the information and reporting versus the needs of law enforcement, FinCEN generally always comes down in favor of providing more information to law enforcement and making sure that law enforcement gets everything it needs. So they'll tolerate a higher burden on reporting companies and the individuals involved.

Now one important thing to know about the Corporate Transparency Act is when does it become effective, and what are the reporting deadlines for companies that have to report under the act. Well, the initial report depends on whether the company is existing at the time the act takes effect, or whether it is formed after the act takes effect. The Corporate Transparency Act takes effect on January 1, 2024, coming up very quickly here. And the first deadline for existing reporting companies, and again this was any entity that was formed before January 1, 2024, or if it's a non-U.S. company, that it was first registered in the U.S. prior to January 1, 2024. So if this applies to an existing company, then that existing company will have one year. They will have until January 1, 2025 to file an initial report with FinCEN. So there will be time to gather information and submit the report to FinCEN.

The deadline is shorter, however, for new reporting companies. These are companies that were either first formed on or after January 1, 2024, or are first registered to do business in the U.S., if it's a non-U.S. reporting company, sometime on or after January 1, 2024. For these types of entities, the Corporate Transparency Act and the regulations to implement it require a new domestic reporting company to file its initial report within 30 calendar days after the earlier of one of two events. The first is that the reporting company receives actual notice that its creation has become effective, such as when it receives the evidence of formation back from a secretary of state. Or if earlier, the date on which the secretary state or equivalent office first provides public notice of the formation, such as through their business entity database, which is available online. A good rule of thumb just to avoid running afoul of the reporting deadlines is to file the report within 30 days of the date the record was submitted for filing, unless there's a delayed effective date.

For non-U.S. entities that first register in the U.S. beginning on January 1, 2024, the initial report must be filed within 30 days after either the date where the company receives actual notice that the registration has been completed, or, if earlier, the date on which the secretary of state or equivalent office provides public notice of that registration, again through the online database or website somehow.

Now there is pending proposed regulations from FinCEN that could temporarily extend the reporting deadline. It's a rule that's under review right now, and we'll know probably by January 1st if it's adopted. But if it is adopted, then, during 2024, reporting companies that are either first formed or registered during the year would actually have 90 days to file the initial report. And the idea here is that this is such a change in the law that it really is important to give people a little extra time during that first year to get used to it.

Well, that's a high-level overview of the Corporate Transparency Act. Now let's take a closer look at what companies have to report under the act. The act applies to reporting companies. Now a reporting company, as it's defined by the Corporate Transparency Act and regulations, it means a corporation, limited liability company, or similar entity. And it includes an entity created by filing a document with the secretary of state or equivalent office, and that would be the equivalent office at a state or with an American Indian tribe. It also includes an entity formed under the law of a foreign country that first registers to do business in the U.S. by filing a document with the secretary of state or similar office in another state or Indian tribe.

Now what constitutes a similar entity was left to FinCEN to determine by regulation. Now, in the regulations, the similar entity is stated to include any entity formed by the filing of a document with a state or an Indian tribe. It's actually somewhat similar to the concept of a registered organization under UCC Article 9, but it's not entirely the same. And FinCEN didn't provide a lot of clarity here because it refused to further define "similar entity" or provide a list of similar entity types. It's intentionally a little bit gray here, and that's to allow for the different types of entities and formation practices that the different states use. So there could be an entity, say a general partnership that is formed by registration in one state but not in another, and as a result it might be a reporting company if it's formed in one state but not in another. There is a lot of ambiguity here, and it is possible that FinCEN will issue some additional guidance before the effective date. But I'm not sure that will be the case.

Under the Corporate Transparency Act, not every corporation, LLC, or similar entity will be a reporting company that has to submit a report to FinCEN. There are a number of exemptions from the reporting requirement. They're listed in the act and in the regulations. There's actually 23 specific exclusions that are provided in the definition of reporting company. In general, these exclusions apply to businesses that are already regulated and required to report beneficial owners, so publicly traded companies and others. In fact, these typically will include financial institutions, any company subject to Securities and Exchange Commission regulation, public utilities, insurance companies, various financial-related entities, any entity that's really already required to report this information.

There's also an exemption for large operating companies. These are entities that have 20 or more full-time employees and that has filed a U.S. income tax return for the previous year that shows at least $5 million in gross receipts, and it has to have an operating presence at a physical office in the United States. These types of companies will be exempt from reporting at least after the first year. A newly formed company cannot be a large operating company because it doesn't have a tax return for the previous year showing $5 million.

And there may be other exemptions in the future. Congress did allow FinCEN to come up with others if they felt it was appropriate. But at this point, FinCEN has decided not to exclude any other types of entities at this time.

Now that we've covered what companies have to report under the Corporate Transparency Act, let's delve down into the details of what information has to be reported for each reporting company.

First off, a reporting company must report certain information about itself. This information includes the full legal name of the reporting company. It also includes all trade names, fictitious names, doing business as, any other name under which the entity has done business, and that is the case regardless of whether the name was actually registered with a state. It has to report the street address of the principal place of business for the entity. A P.O. box or a virtual mailbox isn't going to work. It has to report the jurisdiction in which it was formed, typically like that it's a Delaware corporation, or maybe it was formed under the law of a federally recognized Indian tribe.

And finally, it has to report its IRS taxpayer identification number. There are a couple of issues with taxpayer identification numbers that require some more explanation. One is that a newly formed entity may not have a taxpayer identification number at the time it's formed. Well, FinCEN has determined that 30 days should be more than enough time for a new newly formed entity or newly registered entity to obtain a taxpayer identification number and then submit its initial report under the under the act. However, a foreign reporting company, a non-U.S. reporting company, if it doesn't have a U.S. taxpayer identification number, it can report a taxpayer identification number issued by a foreign government.

In addition to reporting information about itself, a reporting company also has to report personal information about each beneficial owner and company applicant. A beneficial owner and company applicant will, in all cases, be an individual. This information includes for each of these individuals the full legal name of the individual, the individual's date of birth, their residential street address unless the person is a company applicant who is engaged in the business of filing company formation or registration documents, in which case they can provide the business address.

In addition to the name, date of birth, and residential address, the company must report a unique identifying number for the individual obtained from certain government documents that are specified in the statute, and in addition to that, a legible image of the document that provided the unique identifying number, and it has to include a photograph of the individual. Now under the act, the acceptable sources of that unique identifying number are a non-expired U.S. passport, a non-expired ID document issued by a state, local, or tribal government for identification purposes, likewise a non-expired driver's license issued to the individual by a state, or if it's a foreign individual, a non-expired passport issued by the foreign government.

Of course, it's possible that a reporting company will report information that later changes, or that it discovers was incorrect at the time of the initial report. And for that, FinCEN has provided for update and correction reports. So we'll cover those quickly.

The act and regulations require updates to information that has been reported to FinCEN if it later changes, and this applies both to the company information and also to information regarding beneficial owners. Generally, it's not necessary to provide updated information on company applicants.

So the act itself requires updates if any of the reported information changes. And if it does change, the reporting company must submit an update report to FinCEN within 30 calendar days of the change. And again, that's to any of that information with some very narrow exceptions. As I said, changes to the company applicant information, company applicant information becomes less and less important over time. Also, if the image of the identification document changes, but the changes didn't include any of the information reported to FinCEN, then it's not necessary to update that. And it's not necessary to file an update if the company is terminated or dissolves.

So what kind of information might change? Well, obviously, who is a beneficial owner could change. That might change from time to time. Also information reported for a particular beneficial owner, such as their address. Names change as well. Or another example would be if the reporting company suddenly meets the requirements for an exemption and it wants to become exempt, it has to report that information.

And it's not just changes to information that have to be reported. If the initial report contained incorrect information, the act requires the reporting company to correct that information as soon as possible, and actually has strict deadlines for making those corrections. So the act is going to require correction of any incorrect information in the reports. If a company inadvertently submitted incorrect information, it must file a corrected report, or it could face civil and criminal penalties. Moreover, FinCEN is required to assist any person that wants to submit a corrected report, but there are strict deadlines involved in doing so.

The contents of the corrected report should contain all information necessary to make the report complete and accurate. For the most part, it appears that it will just require submitting all the information that was required for an initial report and then just making sure that it's accurate for the corrected report.

And as I mentioned, there is a very strict deadline for submitting correction reports. It must be submitted within 30 calendar days after the reporting company becomes aware or should have known of an error in the initial report.

Now it may sound burdensome to report detailed information about every beneficial owner and applicant every time. And also there's some privacy issues involved because this information has to be provided to the reporting company, and the reporting company in turn relays it to the to FinCEN. So there is a risk of handling actually rather sensitive information sometimes, depending on the identification documents used for the beneficial owner or the company applicant. And FinCEN has provided a way to avoid these problems, and that's through what's called a FinCEN identifier. So I'm going to spend a couple of minutes here talking about the FinCEN identifier.

The FinCEN identifier is a number that's issued by FinCEN to a reporting company, an individual beneficial owner, or an individual company applicant. This simplifies the reporting process because the beneficial owner or company applicant can simply provide their FinCEN identifier to the reporting company and the reporting company then provides that to FinCEN as part of its report. That way it's not necessary for the reporting company to handle all the personal identifiable information of the beneficial owner or the company applicant.

The FinCEN identifier can be issued to a beneficial owner or a company applicant through an application process. The first step of this application process my understanding is that it the individual must register with login.gov to get their general portal access. And then once they've got that, they can go into FinCEN and submit an application. It's done online, and the results are available instantly. So the individual has to provide all the information to FinCEN that is required for a beneficial owner or company applicant. Once they've done that, they will obtain a FinCEN identifier instantly online. So this is all an online process.

An entity, a reporting company can also get a FinCEN identifier for itself, and it can obtain that when it submits an initial report or at any time thereafter. And there may be advantages to the reporting company to have that number, but I'm focusing on the individuals.

So the exact details of the application process will still be forthcoming on this, but it should be coming up in the next couple of months. Now there are some limitations with a FinCEN identifier. It is specific to the individual or entity to whom it is issued. So an individual is going to have that FinCEN identifier. It is not something that can be shared. If it is shared, it's a reporting violation, and there can be severe penalties for that.

Also, an individual or reporting company may only obtain one FinCEN identifier. So a person who might be both a beneficial owner and company applicant would only have the one number, and they may have to report all the information necessary for both a beneficial owner and a company applicant in order to use that number in both cases.

One other note is that currently, at least as it's planned, once a FinCEN identifier has been issued, the holder of that FinCEN identifier, it becomes under a lifelong obligation to update their information if any of it changes, just like a reporting company would have to. That means within 30 days of any change to their name, address, or changes to the identifying document, like the identifier number. So it is a concern, but FinCEN is aware of that and they are looking at options for how to suspend or otherwise cancel a FinCEN identifier. But that that probably won't be forthcoming before the act takes effect. That's somewhere down the road in the future.

So far we've talked about what entities have to report, the information they have to report, and their obligations to keep that information current and correct. Now reporting companies and individuals that fail to keep the information current and correct or willfully report incorrect information, they are going to face reporting violations. So I do want to point out what those penalties are.

Now it is important to understand that both individuals and reporting companies can be subject to penalties under the Corporate Transparency Act. FinCEN can impose civil and criminal penalties on any person, an individual or reporting company that violates their obligations under the regulations or the act itself. And this can apply to third parties as well. Any person who controls or directs another to provide false or incorrect information could be subject to the penalties. And these penalties are rather harsh. They include substantial penalties per day of non-compliance and include potential criminal penalties that would fall into the felony range. So these are serious penalties.

And these penalties can be used and likely will be used at some point, at least the threat of them, to force reluctant in individuals to comply. So if a beneficial owner doesn't want to be forthcoming with the information they're required to report, they have to know that they're going to be under risk of both civil and criminal penalties, and that the reporting company of which they own or exercise substantial control will also be subject to reporting penalties. Same thing applies to company applicants that may not want to provide their information. If they fail to do so, they could very well wind up facing the threat of civil and criminal penalties.

So that's the high-level overview of the Corporate Transparency Act. At this point, I'm going to turn it over to David.

David: Thanks, Paul. That was a really comprehensive deep dive into the CTA legislation itself. And just to quickly introduce myself, this is David Jefferis. I'm a senior director on CSC's Market team, with oversight of a number of our compliance services. And really the CTA has been a hot topic with a lot of corporate clients and law firms that I've had the pleasure to speak with. And so probably one of the burning questions that folks may have is, "Well, how can CSC help organizations comply with the CTA?"

So what are CSC's plans in terms of offering support and solutions for organizations to comply with the upcoming Corporate Transparency Act? Really it's kind of a multi-pronged approach. Maybe you could say it's a two- pronged approach.

And so the first thing that we'll talk about is service. And so what I can say is that we are absolutely evaluating offering what I would call an outsourced filing service where organizations could engage CSC to actually file and complete the necessary reports with FinCEN under the regulation of the CTA.

Now our reality, as we stand here today, is that there is still a fair amount that is unknown, and so we are constantly in communication with FinCEN. And I think as some of these details start to materialize and come into sharper focus, we'll be in a better position to really clarify our ability to offer an ongoing filing service for the CTA itself.

I think what it's also fair though to mention, and this is really represented in the third bullet that's currently on the slide, is that while this is a new regulation in the U.S., this is really not something that's foreign or unfamiliar to CSC. The framework already exists around the world in terms of filings known often as ultimate beneficial ownership filings. UBO is sort of the acronym that's thrown around. And so this is a service that we offer in over a dozen countries today through our Global Services. And so, again, while the CTA is a new regulation and it's a new reporting requirement on U.S. subsidiaries, we're doing similar things in other parts of the world today, so it won't be completely new so to speak to CSC to offer a filing service around beneficial ownership for U.S. subsidiaries.

Now beyond a potential service offering, there's also a technology approach that we're exploring as well. I think the ultimate end state that we'll potentially see is that FinCEN would have an API where organizations like CSC could do electronic filings directly with FinCEN. But as folks likely know, the CTA form, the CTA database, the so-called beneficial ownership secure system, or what's called the BOSS system, they're not finalized quite yet. And so we're not yet in a position to kind of build something towards that end.

So in the interim, we have a technology solution that is award-winning, which is our CSC Entity Management platform. That absolutely provides a secure, structured framework for tracking all of the information relevant to CTA filings, so the data on the reporting companies themselves, information around beneficial owners, information around company applicants. So again, that framework is there today, and organizations actually, as we speak, are adopting that technology to be able to track that information for those CTA filings.

And then really, as we speak, we're in the process of designing really an advanced or enhanced report that will allow organizations to effectively press a button and aggregate from our entity system all of the information relevant to a CTA filing, just to make it more efficient and effective to kind of surface that information as you complete those forms and filings with FinCEN.

So I mentioned a moment ago that we have organizations that are using CSC Entity Management today to track information that's relevant to the FinCEN filings under the CTA legislation. It's worth taking a moment to highlight sort of the full-fledged capabilities of that solution. It can go well beyond just tracking information for the CTA.

So there are functions within the technology where organizations can create electronic minute books. We have a direct integration with DocuSign to be able to facilitate electronic signature workflow. There's a mechanism for building structure charts or what folks sometimes call organizational charts, which is really a powerful automated component of the technology. So when organizations are tracking ownership records, the system can then translate that into either text based or probably the more popular option is the graphical-based structure charts to create that visualization around your legal entity ownership.

We also have an integration with the SEC. So for publicly traded companies that have the obligation to submit Forms 3, 4, and 5 for their insiders, we've got a direct integration with the SEC's EDGAR database for those types of filing submissions.

We also, again talking about integrations, earlier this year launched an integration with the Workday Human Capital Management platform. So for organizations that are using Workday as their so-called HR or HCM system, if something changes about an officer or director within your Workday platform, we can create alerts and notifications to let you know that it may necessitate updates to your officer and director information within the solution.

There's also a robust reporting module. So again, this is a full-fledged, very feature-rich, powerful entity management solution that goes beyond tracking information for the CTA. But with that said, on the next slide, I do want to sort of dive in and get a little bit more granular in terms of how can we track "CTA information" inside of CSC Entity Management.

So again, CSC Entity Management is a very powerful solution with a lot of capabilities around the discipline of legal entity management. But let's talk again in a more granular fashion in terms of, well, what are the features within our entity solution that really lend themselves to tracking all the information that's needed for FinCEN as a part of the CTA regulations.

So I guess where we'll start is the ability to classify entities as reporting versus exempt. And so I've talked to a lot of folks that are kind of preparing for this compliance, and really one of the challenging things is going to be to figure out, "Well, gosh, who are the beneficial owners by percentage or by appointment?" And before we sort of go down that rabbit hole, let's do the first thing first and let's understand which entities actually do need to report versus those that don't. And then we'll save that more difficult analysis for our so-called reporting entities. Again, that's the terminology for an entity that actually does need to submit a filing to FinCEN. So right off the bat, once you perform that analysis, you can very easily flag and tag entities that fall into that reporting requirement.

And then really what's most critical, of course, as a part of this regulation is identifying who are the beneficial owners. And so that could be by virtue of ownership, which we'll mention in a moment. But it also could be by virtue of an individual that exercises so-called substantial or significant control. and so that's often some of the key officers of an organization. And so that information absolutely can be tracked within the solution.

Beyond just tracking the names of those beneficial owners, there is a very secure framework for tracking some of the additional identifying information. So we do know, as a part of the regulation, that for beneficial owners we have to include things like the current address, a birthday, identification information like a driver's license or a passport, expirations around that, or in lieu of that, a FinCEN identifier. But again, there's already a mechanism within the platform to be able to track all those details. So if we're talking about a beneficial owner that perhaps does not have a FinCEN identifier, then it becomes really important to have a place to track all of that information.

Also I mentioned a moment ago there's this org chart module that's based on the ownership data. And so there's a very structured area where we can track who owns an entity. And again, if we're talking about individuals that own 25% or more, again pretty clear that they're crossing over into the definition of a beneficial owner.

Every piece of data in the solution is reportable. So whether we're talking about system fields or if you build unique custom fields in the solution, all that information can be extracted into reports that you can very easily get your fingertips around all the information that you're tracking within the solution. And so we're even, again, designing an enhanced report to make this even more efficient, but again that framework is there today.

I should also mention on an earlier bullet, beyond just the personal data around those beneficial owners, there's also a secure area for tracking documents that we do know that FinCEN requires a clearly scanned image of an identification document, like a passport or driver's license. And so there's an ability to actually store those documents securely in the platform as well.

Again, the ability to aggregate that data, so again information on the reporting company in terms of its name and its principal place of business, if it has any DBAs, owners, officer and directors that are qualified as beneficial owners. Again, you can run reports to pull all that together.

And then there's also a powerful compliance calendar. So if you wanted to create ticklers and reminders and get alerts around when you have filings coming due, again we know that the filing deadlines are different depending on entities formed prior to next year versus entities formed moving forward, starting January 1st of next year. So again, there can be reminders around those compliance obligations for the CTA.

And then, really a quite powerful element of the database is that when changes occur in the technology, those changes are audited and tracked, and they become visible and reportable, so we do know, and this is something that Paul talked about, where again if there are changes to a reporting company or changes to beneficial owners, that's going to in most cases necessitate an amended filing to FinCEN. And so our solution can provide reports, that lend visibility to when there are changes around reporting companies and beneficial owners, that can let you have better transparency to when perhaps an amended filing would be necessary.